This Iconic Group of New York Restaurants Is Abolishing Tipping

A titan of New York City's world-class dining scene has announced an astonishing bit of news: He's eliminating tipping at every one of his 13 restaurants in the coming year.

In an open letter, acclaimed restaurateur Danny Meyer described his decision as motivated by a desire to make pay more equitable at his restaurants.

"We believe hospitality is a team sport, and that it takes an entire team to provide you with the experiences you have come to expect from us," Meyer wrote. "Unfortunately, many of our colleagues — our cooks, reservationists and dishwashers to name a few — aren't able to share in our guests' generosity, even though their contributions are just as vital to the outcome of your experience at one of our restaurants."

The restaurants that make up Meyer's Union Square Hospitality Groupwill eliminate the line for tips on their bills, raise menu prices significantly, raise pay for many of their traditionally untipped workers and institute a restaurant-run revenue-sharing program for servers, according to Eater. The program is designed to roughly match the compensation that they received when they were tipped.

It's a tricky maneuver — balancing fairness for different kinds of restaurant workers possessing clashing interests, all without trying to alienate customers with meteoric price hikes. But in addition to the rhetoric of fairness, the reality is that the move is also in part a product of calculating the effect of economic pressures. Those pressures are becoming impossible to ignore in light of governmental policies designed to push back against worker exploitation.

An old wish: Meyer has expressed interest in abolishing tips for quite some time.

In a thoroughly reported piece on Meyer's announcement in Eater, writer Ryan Sutton dug up Meyer's thoughts on the shortcomings of American-style tipping in a newsletter in 1994. Meyer, even two decades ago, wasn't a fan:

"The American system of tipping is awkward for all parties involved: Restaurant patrons are expected to have the expertise to motivate and properly remunerate service professionals; servers are expected to please up to 1,000 different employers (for most of us, one boss is enough!); and restaurateurs surrender their use of compensation as an appropriate tool to reward merit and promote excellence. ... Imagine, if to prompt better service from your shoe salesman, you had to tip on the cost of your shoes, factoring in your perception of his shoe knowledge and the number of trips he took to the stockroom in search of your size. As a customer, isn't it less complicated that the service he performs is included in the price of your shoes?"

For many years Meyer has seen tipping servers as not only a system that disproportionately rewards some workers, but also gives too much power — and too much responsibility — to customers. Meyer's concern is on strong ground on that point — tipping is a highly arbitrary decision that's governed by unthinking habits, rather than a fair evaluation of server performance.

The policies: According to the report in Eater, Meyer's new pay plan will dramatically reshape the workplaces of the affected restaurants. A vast majority of workers will receive a pay raise. Back of house employees will make a minimum of $11 an hour, and cooks will start at $14 per hour. Traditionally tipped employees who work the floor — such as bussers, bartenders and servers — will have their pay set at $9 per hour, the New York minimum wage as of January 2015. But those who were traditionally tipped will take part in a revenue sharing program that should in theory help compensate them at rates comparable to before the pay model change. Chances are if such a rule wasn't instituted, they would go looking for jobs elsewhere at traditional restaurants.

The difficult part is finding ways to make up for the higher costs. Meyer's restaurants have considered plans that would raise menu prices anywhere from about 20% to 35%, according to Eater. While one might expect menu prices would only have to be increased by a maximum of 20% in order to pull in the revenue lost through tips, it's important to remember that this plan is designed to raise pay for people who work in the kitchen as well. So menu prices could go much higher.

Why are cooks such a big deal? That's where economics comes in.

Better pay is smart business. There's a documented cook shortage in New York that makes it very difficult for restaurants to retain quality kitchen workers long term.

"Average employee tenure at [Meyer's] group's restaurants is comparable, anecdotally, to industry standards: Most stay less than a year, with some leaving in as little as three months," Eaterreports.

The reality is that raising wages for them — as Meyer's plan would do — is the best way to attract talent and retain it. There's plenty of evidence indicating when workers are shown respect in the form of higher pay, they're more likely to stick around and be productive.

New York's new pay policies are adding fuel to the fire. The state has instituted a measure that will raise the minimum wage for fast-food workers to $15 within the next three years in the city and over the next six years across the state. The incremental pay raises that the law mandates will place upward pressure on wages across the food industry, whether the restaurant is slow or fast.

The specter of higher wages — New York Gov. Andrew Cuomo has proposed a statewide $15 minimum wage for all workers in the entire state across all industries — has compelled owners in the food industry to think strategically about how to adapt to a shifting wage landscape. Why not pre-empt the inevitable and become a trendsetter in the process?

The takeaway: There are a few things to take into account that complicate this whole process. First, it's partially a collective action problem. Servers, especially at nice restaurants, often have entrepreneurial sensibilities, and any attempt to change their pay model has to accommodate that. While the wise things to do for a restaurant hoping to pay its kitchen staff more might be to take away tips, pay its servers less and pay its kitchens more, it's extremely difficult to imagine doing that without having every server quit and finding another job at traditional restaurants.

Another issue to factor in is the what all companies experiencing a surge in fixed costs do in order to keep business profitable — maximize efficiency. That can mean taking measures to make cooking and serving more productive. It can also mean fewer employees.

Finally, there is, of course, investor hunger for profit. While Meyer has made it clear that higher costs are mainly to be offloaded onto customers in the form of higher prices, it's not clear whether that is the only course of action — perhaps the profit margin could afford to be narrower. But that's an easier sell to workers or customers than it is to owners.